UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C.
EXPLANATORY NOTE Nortel Networks Corporation previously announced the need to restate its consolidated financial statements for the years ended December 31, 2002 and 2001 and each of its first three quarterly periods for 2003.
TABLE OF CONTENTS PART I ITEM 1. ITEM 2. ITEM 3. ITEM 4.
ITEM 9A. Controls and Procedures 113 PART III ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14.
PART I ITEM 1. Business Overview Nortel Networks Corporation is a recognized leader in delivering communications capabilities that enhance the human experience, ignite and power global commerce, and secure and protect the world’s most critical information. We offer converged multimedia networks that use innovative packet, wireless, voice and optical technologies and are underpinned by high standards of security and reliability.
Brampton, Ontario L6T 5P6. Information contained on our website is not incorporated by reference into our annual report on Form 10-K. Developments in 2003 and 2004 Business environment In 2003, customer spending remained cautious as a result of tightened capital markets, mainly in the first half of 2003, and customers realigning capital spending with their current levels of revenues and profits in order to maximize their return on invested capital.
The need for the Second Restatement resulted in delays in filing our and NNL’s 2003 Annual Reports on Form 10-K, or the 2003 Annual Reports, and Quarterly Reports on Form 10-Q for the first, second and third quarters of 2004, or the 2004 Quarterly Reports, beyond the SEC’s required filing dates in 2004. We refer to the 2003 Annual Reports and the 2004 Quarterly Reports together as the Reports.
Corporation common shares; the exercise of outstanding options granted under Nortel Networks Corporation 2000 Stock Option Plan, or the 2000 Plan, and the Nortel Networks Corporation 1986 Stock Option Plan as amended and restated, or the 1986 Plan, or the grant of any additional options under those plans, or the exercise of outstanding options granted under employee stock option plans previously assumed by us in connection with mergers and acquisitions; and the purchase of units in a Nortel Networks stock f
2004 • the announcement of our planned divestiture of substantially all of our remaining manufacturing operations to Flextronics International Ltd., or Flextronics; • the contribution of certain assets and liabilities of our directory and operator services business in return for a 24% interest in VoltDelta, Resources LLC; • the entering into an agreement with Foundry Networks, Inc.
assembled at the destination. This enables large numbers of communications signals to be directed or routed simultaneously and more efficiently than in circuit networking. Our data networking solutions consist of products and services designed to enable the transportation of data information across a network.
Network access Radio network access equipment uses radio waves to provide wireless access to the subscriber’s device, enabling the wireless subscriber to connect to the network to send and receive data, voice and multimedia communications. The key network elements in radio access are base station transceivers or access points and base station/radio network controllers. We offer our customers a wide range of base station transceivers and base station controllers for all of the standards that we support.
• Our Wireless Mesh Network solution, designed to allow our customers to reduce the costs of high-speed wireless data transport from wireless access networks to wired broadband networks, is now generally available and has been deployed in the United States and Asia Pacific. • Our enterprise grade WLAN access products are generally available for commercial deployment by our wireless service provider customers.
Competition Our major competitors in the global wireless infrastructure business have traditionally included Telefonaktiebolaget LM Ericsson, Nokia Corporation, Siemens Aktiengesellschaft, Motorola, Inc. and Lucent Technologies Inc. Nokia and Siemens compete in the sale of GSM and UMTS equipment, whereas Lucent competes in the sale of CDMA and UMTS equipment. Motorola is a competitor in the sale of GSM, UMTS and CDMA equipment.
Data networking and security solutions We offer a broad range of data networking (packet switching and routing) and security solutions for our enterprise customers.
Globally, enterprise customers continue to invest in equipment for their communications networks, primarily for network security and resiliency, for voice over IP, WLANs and for virtual private networks.
Circuit and packet voice solutions We are a leader in the development and deployment of highly scalable circuit switched and secure voice over packet solutions such as voice over IP for wireline and wireless service providers around the world. Our voice over packet solutions offer service providers opportunities for new revenue sources and sustainable operating and capital cost reduction, as well as high levels of reliability and network resiliency.
• Enhancements to the MCS 5200, part of our multimedia communications portfolio, that will allow a service provider to offer intelligent multimedia services across any manufacturer’s circuit switches. Additionally, development will focus on increasing the breadth and usability of the MCS 5200 applications.
providers are also focused on implementing voice over IP technology to enable opportunities for additional growth, network efficiency and revenue-generating services. There is also a growing demand for voice over IP technology among cable operators in CALA. Customers We offer our Wireline Networks products and services to a wide range of wireline and wireless service providers around the world.
Our optical networking solutions are designed to provide metropolitan, regional and long-haul, high-capacity transport and switching of data, voice and multimedia communications signals. These solutions include photonic Dense Wavelength Division Multiplexing, or DWDM, transmission solutions, synchronous optical transmission solutions, optical switching solutions and network management and intelligence software. We also offer our customers a variety of related professional services.
We continue to develop and enhance our Optical Networks portfolio, including by: • enhancing our optical Ethernet portfolio by introducing new Ethernet switching and transport capabilities designed to improve the productivity of our enterprise customers and the services offered by our service provider customers; • introducing in 2004, a new common photonic layer product that simplifies and automates the deployment and operation of medium and long-haul optical links; • introducing the second release of
We are also focused on enterprises and we continue to provide optical solutions for private enterprise networking and also for service providers to build and operate custom dedicated networks for enterprises. We leverage numerous channels for delivering optical networking solutions to enterprises from our own direct sales force for large enterprises and governments and through distributors, resellers and partners to offer our solution to medium-sized enterprises and smaller enterprises.
to including orders in backlog, customers must have approved credit status. However, from time to time, some customers may become unable to pay for or finance their purchases in which case the order is removed from our backlog. Product standards, certification and regulations Our products are subject to equipment standards, registration and certification in Canada, the United States, the European Union and other countries.
Through our existing manufacturing model, we are generally able to obtain sufficient materials and components from global sources to meet the needs of our four reportable segments.
Our investment activity remained at a low level in 2003 and in 2004. We may make selective minority investments in start-up ventures and certain other companies where we believe the relationship could lay the foundation for future alliances that would support our customer solutions. In certain circumstances, we may also acquire an equity position in a company as consideration for a divested business.
fail to provide us with significant competitive advantages. See “Risk factors/forward looking statements” in the MD&A section of this report. The duration and level of protection of our intellectual property rights are dependent upon the laws and requirements of the jurisdictions providing or controlling those rights.
At December 31, 2003, labor contracts covered approximately five percent of our employees worldwide.
Working capital For a discussion of our working capital practices, see “Long-term debt, credit and support facilities” in note 11 of the accompanying consolidated financial statements and “Liquidity and capital resources” in the MD&A section of this report. Risk factors THIS ANNUAL REPORT ON FORM 10-K CONTAINS FORWARD LOOKING INFORMATION THAT IS SUBJECT TO IMPORTANT RISKS AND UNCERTAINTIES. THE RESULTS OR EVENTS PREDICTED IN THESE STATEMENTS MAY DIFFER MATERIALLY FROM ACTUAL RESULTS OR EVENTS.
ITEM 2. Properties At December 31, 2003, we operated 208 sites around the world occupying approximately 13.7 million square feet.
ITEM 3. Legal Proceedings Subsequent to the February 15, 2001 announcement in which Nortel Networks provided revised guidance for financial performance for the 2001 fiscal year and the first quarter of 2001, Nortel Networks and certain of its then current officers and directors were named as defendants in more than twenty-five purported class action lawsuits. These lawsuits in the U.S.
materials pending the replacement of the representative plaintiffs. On February 19, 2004, the plaintiffs’ counsel advised the Court of a potential new representative plaintiff. On February 26, 2004, the defendants requested the Court to direct the plaintiffs’ counsel to bring a motion to permit the withdrawal of the current representative plaintiffs and to substitute the proposed representative plaintiff.
California Supreme Court seeking permission to appeal the Court of Appeal decision. On October 22, 2003, the California Supreme Court denied, without opinion, the defendants’ petition for review. On December 22, 2003, the plaintiffs served their motion for certification of a class of purchasers of Bay Networks’ common shares from July 25, 1995 through to October 14, 1996. Hearing of the plaintiffs’ motion for class certification was held on May 4, 2004.
indeterminate amounts or could result in fines and penalties. Nortel Networks cannot determine whether these actions, suits, claims and proceedings will, individually or collectively, have a material adverse effect on the business, results of operations, financial condition and liquidity of Nortel Networks. Nortel Networks and any named directors and officers of Nortel Networks intend to vigorously defend these actions, suits, claims and proceedings.
and evolution of environmental laws and regulations, and the identification of presently unknown remediation requirements. Consequently, Nortel Networks liability could be greater than its current estimate. ITEM 4. Submission of Matters to a Vote of Security Holders Not applicable. PART II ITEM 5.
Dividends On June 15, 2001, Nortel Networks Corporation announced that its Board of Directors decided to discontinue the declaration and payment of common share dividends. As a result, dividends have not been declared and paid on Nortel Networks Corporation common shares since June 29, 2001, and future dividends will not be declared unless and until the Board of Directors decides otherwise.
ITEM 6. Selected Financial Data (Unaudited) The selected financial data presented below was derived from Nortel Networks Corporation’s audited consolidated financial statements and related notes thereto included elsewhere in this Annual Report on Form 10-K except for the summarized balance sheet data as of December 31, 2001 and 2000. Readers should note the following information regarding the selected financial data presented below.
(millions of U.S.
The following information provides detailed disclosure in respect of each material component of the Second Restatement adjustments to the accumulated deficit as of December 31, 2000: Summary of Second Restatement Adjustments on Accumulated Deficit as of December 31, 2000: (millions of U.S.
undelivered element. To correct for these items, related cost provisions were reversed and revenues and associated cost of revenues were recognized in the appropriate periods when all elements had been delivered. Revenues were recognized upon product delivery to a certain reseller who lacked economic substance apart from Nortel Networks. Revenue should have been deferred and only recognized by Nortel Networks upon sale by the reseller to an end customer.
ITEM 7.
Amortization of intangibles Deferred stock option compensation Special charges Gain (loss) on sale of businesses and assets Other income (expense) — net Interest expense Income tax benefit (expense) Net earnings (loss) from continuing operations Results of operations — discontinued operations Liquidity and capital resources Cash flows Uses of liquidity Contractual cash obligations JDS purchase arrangement Customer financing Joint ventures/minority interests Discontinued operations Sources of liquidity Credi
Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read this Management’s Discussion and Analysis of Financial Condition and Results of Operation, or MD&A, in combination with the accompanying audited consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States, or U.S. GAAP.
• Wireless Networks — Our Wireless Networks segment provides communications networks that enable end-users to be mobile while they send and receive voice and data communications using wireless devices, such as cellular telephones, personal digital assistants and other computing and communications devices. Our Wireless Networks customers are wireless service providers, and their customers are the subscribers for wireless communications services.
restatement (effected in December 2003) of our consolidated financial statements for the years ended December 31, 2002, 2001 and 2000 and for the quarters ended March 31, 2003 and June 30, 2003, or the First Restatement.
Reports have been delayed, and because both contribution margin and Management EBT were available to the former chief operating decision maker during 2003, we have determined that it is appropriate to disclose both contribution margin and Management EBT for the periods presented. See “Segment information — General description” in note 6 of the accompanying consolidated financial statements. From a liquidity perspective, we maintain strict controls over our sources and uses of cash.
In addition to the above, we also expect to incur capital cash costs of approximately $50 in 2005 for facility improvements related to the real estate actions. We anticipate cost savings from the implementation of the work plan of approximately $500 in 2005, which is expected to increase on an annualized basis beyond 2005 as the full impact of the work plan is realized. We expect that this work plan will primarily be funded with cash from operations.
control over financial reporting (throughout this report, unless otherwise indicated, “reportable condition” and “material weakness” have the meanings as formerly set forth under standards established by the American Institute of Certified Public Accountants, or AICPA).
Consolidated Statement of Operations data for the year ended December 31, 2002 Revenues Gross profit Operating earnings (loss) Earnings (loss) from continuing operations before income taxes, minority interests and equity in net loss of associated companies Net earnings (loss) from continuing operations Net earnings (loss) from discontinued operations — net of tax Net earnings (loss) As previously reported Adjustments As restated $ $ $ 10,569 3,771 (3,435) (3,721) (3,286) 20 (3,266) 439 134 363 372
Foreign exchange As part of the plan to address a material weakness reported in our Quarterly Report on Form 10-Q for the period ended September 30, 2003, a review of foreign exchange accounting was undertaken. The net impact was a decrease to pre-tax loss of $63 and $132 for the years ended December 31, 2002 and 2001, respectively. The significant items were as follows: • we re-examined the determination of the functional currency for certain entities based on the guidance under SFAS No.
The adjustment to income tax benefit, substantially all as a result of the Second Restatement adjustments, was an increase of $15 and a decrease of $401 for the years ended December 31, 2002 and 2001, respectively. The adjustment to minority interests as a result of the Second Restatement adjustments was an increase of $26 and a decrease of $12 for the years ended December 31, 2002 and 2001, respectively.
Consolidated Statement of Operations data for the three months ended June 30, 2003 As previously reported Revenues Gross profit Operating earnings (loss) Earnings (loss) from continuing operations before income taxes, minority interests and equity in net loss of associated companies Net earnings (loss) from continuing operations Net earnings (loss) from discontinued operations — net of tax Net earnings (loss) $ Adjustments 2,338 $ 1,028 90 67 38 (1) 37 As restated (53) $ (146) (186) (154) (131) (7) (13
Consolidated Statement of Operations data for the nine months ended September 30, 2003 As previously reported Revenues Gross profit Operating earnings (loss) Earnings (loss) from continuing operations before income taxes, minority interests and equity in net loss of associated companies Net earnings (loss) from continuing operations Net earnings (loss) from discontinued operations — net of tax Net earnings (loss) $ Adjustments 6,981 $ 3,264 81 64 (3) 244 233 As restated (54) (357) (378) (217) (236) (87
Intercompany balances Historically, we had certain intercompany balances that did not eliminate upon consolidation, or out-of-balance positions, and had recorded provisions accordingly. As part of the Second Restatement, we reviewed these provisions and determined that they should not have been recorded. We recorded adjustments in the appropriate periods to reverse these provisions and to correct the significant out-of-balance positions.
• lack of sufficient personnel with appropriate knowledge, experience and training in U.S. GAAP and lack of sufficient analysis and documentation of the application of U.S.
As we and NNL will not have filed all of the Reports by January 15, 2005, EDC will have the right, on such date, (absent a further waiver in relation to the delayed filings and the Related Breaches), to (i) terminate the EDC Support Facility (ii) exercise certain rights against collateral or require NNL to cash collaterize all existing support, or (iii) require NNL to cash collaterize all existing support. In addition, the Related Breaches will continue beyond the filing of the Reports.
result in a holder or a group of related holders holding 25% or more of the outstanding principal amount of these notes. See “Liquidity and capital resources” and “Risk factors/forward looking statements”. Shelf registration statement Owing to the delayed filing of the Reports, we are currently unable to use, in its current form, the remaining approximately $800 of capacity under our shelf registration statement filed with the SEC for various types of securities.
Evolution of our supply chain strategy Over the last five years, we have divested most of our manufacturing activities to Electronic Manufacturing Services, or EMS, suppliers.
Ownership adjustment in our French and German operations On September 18, 2003, consistent with our overall global business strategy, we realigned our business activities in France and Germany by increasing our ownership in our core businesses in these countries. As a result of this realignment, we acquired the 42% minority interest in Nortel Networks Germany GmbH & Co. KG and the 45% minority interest in Nortel Networks France S.A.S.
Customer financing arrangements On December 15 and 16, 2004, we sold certain notes receivable and convertible notes receivable that had been received as a result of the restructuring of a customer financing arrangement for cash proceeds of $116. The net carrying amount of the notes receivable and convertible notes receivable was $56. On December 23, 2004, a customer financing arrangement was restructured.
2003 vs. 2002 Our consolidated revenues declined 7% in 2003 compared to 2002. There were substantial declines in Wireline Networks and Optical Networks while Wireless Networks increased 5% and Enterprise Networks increased 7%. The decline was primarily due to the continued industry adjustment and capital spending restrictions experienced by our service provider customers.
• voice over packet technologies; • third generation wireless technologies; and • expansion and enhancement of existing networks due to subscriber growth and competitive pressures. The period of relative industry stability that had characterized the second half of 2003 continued into 2004. For 2005, we expect revenue growth over 2004 primarily due to continued growth in the above areas.
substantial decline in Canada and a decline in the U.S. as customers continued to experience capital spending restrictions as a result of their continued focus on capital and cash flow management. In Asia Pacific, CDMA revenues increased substantially in the first half of 2003 compared to the same period in 2002 primarily due to new contracts with certain service provider customers and other customers expanding their existing networks to meet increased subscriber demand.
globally also contributed to the TDMA revenue declines. In 2002, we continued to experience significant pricing pressures on our TDMA technologies in the U.S. resulting from the increased competition for customers. TDMA revenues continued to be a smaller portion of Wireless Networks in 2002 compared to 2001. GSM revenues declined substantially in 2002 compared to 2001 due to substantial declines in Asia Pacific and EMEA.
increase in revenues of $150 in 2003. In addition, there was a substantial increase in revenues associated with our Internet Protocol, or IP, telephony solutions as customers continued to migrate towards converged packet voice solutions. Revenues associated with the data networking and security portion of this segment decreased significantly in 2003 compared to 2002.
capital expenditures and operating costs. Also, we anticipate that demand will continue to decline for our traditional circuit switching products, however, it is difficult to determine the extent to which future declines in demand will occur as a result of the migration to voice over packet technologies. In 2005, we are focused on increasing our market presence with enterprise customers. In particular, we are focusing on leading enterprise customers with high performance networking needs.
2002 vs. 2001 The 41% decline in Wireline Networks revenues in 2002 compared to 2001 was primarily due to a substantial reduction in capital spending by our service provider customers.
half of 2003 and continued capital spending restrictions in the U.S., Canada and EMEA as customers continued to focus on maximizing return on invested capital by increasing the capacity utilization rates and efficiency of existing networks. In Asia Pacific, optical long-haul revenues declined substantially in 2003 compared to 2002 primarily due to the completion of network build-outs for certain customers in 2002 that were not repeated in 2003.
2004 and 2005 During 2004, our major customers in the optical long-haul portion of Optical Networks remained focused on maximizing return on their invested capital by increasing the capacity utilization rates and efficiency of existing networks. We expect that any additional capital spending by those customers in the near term will be increasingly directed to opportunities that enhance customer performance, revenue generation and cost reduction.
reductions in the selling price of certain products; and • improvements in other operations related costs; partially offset by • an increase in contract-related costs including customer trials.
Optical Networks gross margin declined by approximately 5 percentage points in 2002 compared to 2001 primarily due to: • pricing pressures on the sale of certain products; partially offset by • reduced inventory provisioning and other contract and customer settlement costs in 2002. Operating expenses Selling, general and administrative expense SG&A expense As % of revenues $ For the years ended December 31, 2003 2002 2001 2003 vs 2002 $ Change % Change 2002 vs 2001 $ Change % Change 1,939 19.
Enterprise Networks Enterprise Networks SG&A expense decreased in 2003 compared to 2002 and decreased substantially in 2002 compared to 2001 primarily due to: • the continued impact of our workforce reductions, primarily in the U.S. and Canada, and associated reductions in other related costs such as information services and real estate; and • a decrease in provisioning for trade receivables.
• services edge capability to realize simplification of customer network operations and broadband access technologies, including wireless and wireline; and • enhanced network security to ensure the level of reliability and performance that has traditionally existed in carrier networks.
of the volume of our business.
primarily due to the completion of the deferred compensation amortization associated with certain employees’ stock option vesting periods and the cancellation of unvested stock options that were held by employees whose employment was terminated. Special charges During 2003, we continued to implement our restructuring work plan initiated in 2001. In addition, as described below, certain exit activities were initiated in 2003.
In addition to these charges were revisions to prior accruals of $19 resulting primarily from changes in estimates for sublease income and costs to vacate certain properties, across all segments. During 2003, the provision balance for contract settlement and lease costs was drawn down by cash payments of $275. The remaining provision, net of approximately $317 in estimated sublease income, is expected to be substantially drawn down by the end of 2013.
Gain (loss) on sale of businesses and assets In 2003, gain on sale of businesses and assets of $4 was primarily due to the recognition of the remaining unamortized deferred gain related to the sale of substantially all of the assets of our Cogent Defence Systems, or CDS, business during the year ended December 31, 2001.
economic environment. Public company investments were generally written down against earnings to their then current market value. Private company investments were written down to the estimated current market value by applying a telecommunications market average adjustment factor calculated using the declines of a representative group of public companies.
our discontinued operations and recorded any resulting gains or losses in net earnings (loss) from discontinued operations in the period in which they occurred. As of December 31, 2003, there was no change to the initial disposal strategy or intent to exit the business which was approved by the Board of Directors on June 14, 2001.
In 2003, we continued to strengthen our liquidity position. As of December 31, 2003, our primary source of liquidity was cash. At December 31, 2003, we had cash of $3,997 excluding $63 of restricted cash and cash equivalents. We believe this cash will be sufficient to fund the changes to our business model in accordance with the strategic plan (see “Business overview — Our strategic plan and outlook”), manage our investments and meet our customer commitments for at least the next 12 months.
U.S. Cash flows used in financing activities were $359 and were primarily due to $270 used to reduce our long-term debt, a reduction of our notes payable by a net amount of $45 and $35 used in connection with the payment of dividends to NNL’s preferred shareholders. In 2003, our cash increased $176 due to favorable effects of changes in foreign exchange rates. Approximately $150 of the favorable impact was the result of favorable changes in the euro and the British pound.
Contractual cash obligations Payments due Contractual cash obligations (a) 2004 2005 2006 2007 2008 Thereafter Total obligations Long-term debt (b) Operating leases (c) Purchase obligations Outsourcing contracts Obligations under special charges Pension, post-retirement and post-employment obligations Other long-term liabilities reflected on the balance sheet $ 119 163 1,209 161 145 170 13 $ 16 159 1,123 104 95 – 6 $ 1,492 145 102 104 72 – 4 $ 15 131 – 104 59 – 3 $ 1,816 113 – 104 49 – 3
Pension, post-retirement and post-employment obligations During 2003, we made cash contributions to our defined benefit pension plans of approximately $300. In 2004, we made cash contributions of approximately $140 to our defined benefit pension plans, which excludes $78 of deferred contributions for 2004 which were made in 2003, and approximately $30 to our post-retirement benefit plans.
We expect to fund substantially all of our current remaining undrawn commitments of $69 in 2004 or 2005. However, we also expect that we will be able to arrange for third party lenders to assume these obligations in the same timeframe.
December 31, 2006. The EDC Support Facility does not materially restrict NNL’s ability to sell any of its assets (subject to certain maximum amounts) or to purchase or pre-pay any of its currently outstanding debt. The EDC Support Facility can be suspended or terminated if NNL’s senior long-term debt rating by Moody’s has been downgraded to less than B3 or if its debt rating by S&P has been downgraded to less than B–.
Credit ratings Rating on long-term debt issued or guaranteed by Nortel Networks Limited/Nortel Networks Corporation Rating on preferred shares issued by Nortel Networks Limited Last change Standard & Poor’s Ratings Service B– CCC– April 28, 2004 Moody’s Investors Service, Inc. B3 Caa3 November 1, 2002 Rating agency On April 28, 2004, S&P downgraded its ratings on NNL, including its long-term corporate credit rating from “B” to “B–” and its preferred shares rating from “CCC” to “CCC–”.
as security for these types of bonds. See “Available support facility” for additional information on the EDC Support Facility and the security agreements and see “Developments in 2003 and 2004 — Nortel Networks Audit Committee Independent Review; restatements; related matters — EDC Support Facility” for additional information in connection with amendments to the EDC Support Facility and developments in connection with the EDC Support Facility and related security agreements subsequent to December 31, 2003.
• lease agreements; • third party debt agreements; • indemnification of banks and agents under our credit and support facilities and security agreements; and • other indemnification agreements. In 2003, we did not make any significant payments under any of these indemnifications or guarantees. In certain cases, due to the nature of the agreement, we have not been able to estimate our maximum potential loss or the maximum potential loss has not been specified.
revenue is not recognized until the earlier of (i) the undelivered element is delivered or (ii) fair value of the undelivered element exists, unless the undelivered element is a service, in which case revenue is recognized as the service is performed once the service is the only undelivered element. Our assessment of which revenue recognition guidance is appropriate to account for a deliverable also can involve significant judgment.
accounts receivable amounts that are greater than 365 days are fully provisioned for and amounts greater than 180 days are 50% provisioned for. In subsequent periods, we may be required to make adjustments once further information becomes available or actual events occur. As a result, we may incur significant adjustments to our provisions for trade, notes and long-term receivables. We recorded net receivable recoveries, related to continuing operations, of $180 in 2003.
December 31, 2003 2002 Gross inventory Inventory provisions $ 2,416 (1,226) $ 2,686 (1,180) Inventories — net $ 1,190 $ 1,506 Inventory provisions as a percentage of gross inventory 51% Other reserves for claims related to our contract manufacturers and suppliers (a) (a) (120) 44% (171) This amount was included in other accrued liabilities and related to cancellation charges, contracted for inventory in excess of future demand and the settlement of certain other claims.
additional tax valuation allowance for all or a portion of the net deferred tax assets, which may have a material adverse effect on our business, results of operations and financial condition. Alternatively, if our future results of operations are better than expected, these assessments may result in the reduction of our valuation allowances.
In 2001, we incurred a goodwill write down of $11,426. In 2001, we performed an assessment of the carrying values of goodwill associated with our acquisitions. The assessment during that period was performed in light of the significant negative industry and economic trends impacting our operations and expected future growth rates, and the adjustment of technology valuations.
Change in Assumption Effect on 2003 pre-tax pension expense * Effect on 2003 pre-tax post-retirement benefit expense Increase/(decrease) Increase/(decrease) 1 percentage point increase in the expected return on assets ($50) $ <1 1 percentage point decrease in the expected return on assets 50 <1 1 percentage point increase in the discount rate (73) (3) 1 percentage point decrease in the discount rate 67 2 * excludes settlement costs (lump sum and termination payments to participants which di
and plant and equipment write downs to ensure that these accruals are still appropriate. As of December 31, 2003, we had $64 in accruals related to workforce reduction charges and $456 in accruals related to contract settlement and lease costs, which included significant estimates, primarily related to sublease income over the lease terms and other costs for vacated properties.
• Accounting for certain financial instruments with characteristics of both liabilities and equity — the adoption of SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” did not have a material impact on our results of operations and financial condition.
our post-retirement benefit plans qualify as actuarially equivalent to the benefit provided under the MPDIM Act, for which it expects to receive federal subsidies. We expect that other portions of the plans will not be actuarially equivalent. The financial impact of the federal subsidies was determined by remeasuring our retiree life and medical obligation as of January 1, 2004, as provided under the retroactive application provision of FSP FAS 106-2.
exposure to international markets, we regularly monitor all of our material foreign currency exposures. We cannot predict whether we will incur foreign exchange gains or losses in the future. However, if significant foreign exchange losses are experienced, they could have a material adverse effect on our business, results of operations and financial condition.
Legal proceedings Nortel Networks and/or certain of our directors and officers have been named as defendants in various class action lawsuits. We are unable to determine the ultimate aggregate amount of monetary liability or financial impact to us in these legal matters, which unless otherwise specified, seek damages from the defendants of material or indeterminate amounts. We are also a defendant in various other suits, claims, proceedings and investigations which are in the normal course of business.
substantial judgments, settlements or other penalties. • Material adverse legal judgments, fines, penalties or settlements could have a material adverse effect on our business, results of operations, financial condition and liquidity, which could be very significant. • We cannot predict the outcome of the Revenue Independent Review being undertaken by our Audit Committee.
operations, financial condition and liquidity. We are subject to significant pending civil litigation, which if decided against us, could require us to pay substantial judgments, settlements or other penalties. In addition to being subject to litigation in the ordinary course of business, we are currently, and may in the future be, subject to class actions, other securities litigation and other actions arising in relation to our accounting restatements.
• an inappropriate ‘tone at the top’, which contributed to the lack of a strong control environment; as reported in the Independent Review Summary set forth in the “Controls and Procedures” section of this report, there was a “Management ‘tone at the top’ that conveyed the strong leadership message that earnings targets could be met through application of accounting practices that finance managers knew or ought to have known were not in compliance with U.S.
In addition, starting with our fiscal year 2004 Annual Report on Form 10-K, we must comply with Section 404(a) of the Sarbanes-Oxley Act of 2002, and the related SEC rules, which require management to assess the effectiveness of our internal control over financial reporting annually and to include in our Annual Report on Form 10-K a management report on that assessment, together with an attestation by our independent registered public accounting firm.
any relevant series of debt securities provide notice of this non-compliance and we or NNL, as applicable, fail to file and deliver the relevant Report within 90 days after the notice is provided, then the trustee under the indenture or the holders will have the right to accelerate the maturity of the relevant series of debt securities. While such notice could have been given any time after March 30, 2004, neither we nor NNL has received a notice as of the date of this report.
The delay in filing certain of our Reports could cause the Toronto Stock Exchange and/or the New York Stock Exchange to commence suspension or delisting procedures in respect of Nortel Networks Corporation common shares or other of our or NNL’s listed securities.
In connection with the delay in filing our 2003 Annual Reports, as of March 10, 2004, we suspended the purchase of our common shares under the stock purchase plans for eligible employees in eligible countries that facilitate the acquisition of our common shares; the exercise of outstanding options granted under the 2000 Plan or the 1986 Plan, or the grant of any additional options under those plans, or the exercise of outstanding options granted under employee stock option plans previously assumed by us in
As a result, the costs actually incurred in connection with the restructuring efforts may be higher than originally planned and may not lead to the anticipated cost savings and/or improved results. As part of our review of restructured businesses, we look at the recoverability of their tangible and intangible assets.
caused us to record an expense over the stock option vesting period, based on the fair value at the date the options are granted, and could have a significant negative effect on our reported results. Additionally, we are required to perform goodwill impairment tests on an annual basis and between annual tests in certain circumstances, to value our deferred tax assets and to accrue unfunded pension liabilities, each of which may result in a negative effect on our reported results.
• higher product, material or labor costs; • increased inventory provisions or contract and customer settlement costs; • warranty costs; • obsolescence charges; • loss of cost savings on future inventory purchases as a result of high inventory levels; • introduction of new products and costs of entering new markets; • increased levels of customer services; • changes in distribution channels; • excess capacity or excess fixed assets; • accruals for employee incentive bonuses; • further r
these customers, could have a material adverse effect on our business, results of operations and financial condition. Our business may be materially and adversely affected by our high level of debt. In order to finance our business, we have incurred significant levels of debt compared to historical levels, and we may need to secure additional sources of funding, which may include debt or convertible debt financing, in the future.
valuations, which themselves are based on certain assumptions about the long-term operation of the plans, including employee turnover and retirement rates, the performance of the financial markets and interest rates. If experience differs from the assumptions, the amounts we are obligated to contribute to the plans may increase. In particular, the performance of the financial markets is difficult to predict, particularly in periods of high volatility in the equity markets.
In the past, we acquired companies that we believed would enhance the expansion of our business and products. We may make selective opportunistic acquisitions of companies or businesses with resources and product or service offerings capable of providing us with additional product and/or market strengths.
could be materially and adversely affected. In addition, unanticipated changes in market demand for products based on a specific technology, particularly lower than anticipated, or delays in, demand for IP-optimized networking solutions, particularly long-haul and metro optical networking solutions, or 3G wireless networks, could have a material adverse effect on our business, results of operations and financial condition if we fail to respond to those changes in a timely and effective manner.
• challenges in staffing and managing international opportunities; • other factors, depending on the country involved; and • acts of war or terrorism. Difficulties in foreign financial markets and economies and of foreign financial institutions, particularly in emerging markets, could adversely affect demand from customers in the affected countries.
development, increased financial strength, or a broader base of customers, creating even more powerful or aggressive competitors. We may also see rationalization among equipment/component suppliers. The business failures of operators, competitors or suppliers may cause uncertainty among investors and in the industry generally and harm our business.
statement) filed with the SEC (with respect to the common shares to be delivered) that contains a related current prospectus. Under the terms of the Purchase Contract and Unit Agreement, which governs the purchase contracts, we have agreed to use commercially reasonable efforts to have in effect a registration statement covering the common shares to be delivered and to provide a prospectus in connection therewith.
technologies currently being developed, or which we have not yet commercially deployed, or which require us to build networks. Some of these supply contracts contain delivery and installation timetables, performance criteria and other contractual obligations which, if not met, could result in our having to pay substantial penalties or liquidated damages and/or the termination of the supply contract.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk Refer to “Market risk” in Management’s Discussion and Analysis of Financial Condition and Results of Operations.
PART II ITEM 8.
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS To the Shareholders and Board of Directors of Nortel Networks Corporation We have audited the accompanying consolidated balance sheets of Nortel Networks Corporation and its subsidiaries (“Nortel Networks”) as of December 31, 2003 and 2002 and the related consolidated statements of operations, changes in equity and comprehensive income (loss) and cash flows for each of the three years in the period ended December 31, 2003.
NORTEL NETWORKS CORPORATION Consolidated Statements of Operations for the years ended December 31 (millions of U.S.
NORTEL NETWORKS CORPORATION Consolidated Balance Sheets as of December 31 (millions of U.S.
NORTEL NETWORKS CORPORATION Consolidated Statements of Changes in Equity and Comprehensive Income (Loss) (millions of U.S.
NORTEL NETWORKS CORPORATION Consolidated Statements of Cash Flows for the years ended December 31 (millions of U.S.
NORTEL NETWORKS CORPORATION Notes to Consolidated Financial Statements (millions of U.S. dollars, except per share amounts, unless otherwise stated) 1. Nortel Networks Corporation Nortel Networks Corporation (“Nortel Networks”) is a recognized leader in delivering communications capabilities, serving both service provider and enterprise customers.
amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
For arrangements that include hardware and software where software is considered more than incidental to the hardware, provided that the software is not essential to the functionality of the hardware and the hardware and software represent separate units of accounting, revenue related to the software element is recognized under SOP 97-2 and revenue related to the hardware element is recognized under SOP 81-1 or SAB 104.
Research and development (“R&D”) costs are charged to net earnings (loss) in the periods in which they are incurred. However, costs incurred pursuant to specific contracts with third parties for which Nortel Networks is obligated to deliver a product are charged to cost of revenues in the same period as the related revenue is recognized. Related global investment tax credits are deducted from the income tax provision.
Inventories are valued at the lower of cost (calculated generally on a first-in, first-out basis) or market. The cost of finished goods and work in process is comprised of material, labor and manufacturing overhead. Provisions for inventory are based on estimates of future customer demand for products, including general economic conditions, growth prospects within the customer’s ultimate marketplaces and market acceptance of current and pending products.
Long-lived assets held and used Nortel Networks tests long-lived assets or asset groups held and used for recoverability when events or changes in circumstances indicate that their carrying amount may not be recoverable.
of the reporting unit to be allocated to the underlying assets and liabilities of that reporting unit, resulting in an implied fair value of goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss equal to the excess is recorded in net earnings (loss).
Nortel Networks net earnings (loss) and cash flows may be negatively impacted by fluctuating interest rates, foreign exchange rates and equity prices. To effectively manage these market risks, Nortel Networks enters into foreign currency forward contracts, foreign currency swaps, foreign currency option contracts, interest rate swaps and equity forward contracts. Nortel Networks does not hold or issue derivative instruments for trading purposes.
fair value based method for expense recognition of employee awards resulted in $26 (net of tax of nil) of stock option expense during 2003. Stock-based awards that are settled or may be settled in cash or shares purchased on the open market at the option of employees or directors are recorded as liabilities. The measurement of the liability and compensation cost for these awards is based on the intrinsic value of the award and is recorded in net earnings (loss) over the vesting period of the award.
(v) Recent accounting pronouncements (i) On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “MPDIM Act”) was signed into law in the U.S. The MPDIM Act introduced a prescription drug benefit under Medicare (specifically, Medicare Part D) as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D.
3. Restatement First Restatement In May 2003, Nortel Networks commenced certain balance sheet reviews at the direction of certain members of former management that led to a comprehensive review and analysis of its assets and liabilities (the “Comprehensive Review”), which resulted in the restatement (effected in December 2003) of its consolidated financial statements for the years ended December 31, 2002, 2001 and 2000 and for the quarters ended March 31, 2003 and June 30, 2003 (the “First Restatement”).
communications and related accounting entries over multiple fiscal periods. In addition, the review of accruals and provisions and the application of accounting literature to certain matters in the Second Restatement, including revenue recognition, foreign exchange, special charges and discontinued operations, was complicated by the passage of time, lack of availability of supporting records and the turnover of finance personnel.
Consolidated Statement of Operations for the year ended December 31, 2002 Revenues Cost of revenues As previously reported Adjustments As restated $ $ $ 10,569 6,798 439 305 11,008 7,103 Gross profit 3,771 134 3,905 Selling, general and administrative expense Research and development expense Amortization of acquired technology and other Deferred stock option compensation Special charges Goodwill impairment Other special charges (Gain) loss on sale of businesses and assets 2,636 2,208 157 87
Summary of Restatement Adjustments for the year ended December 31, 2002: Revenues Cost of revenues Revenues and cost of revenues Foreign exchange Intercompany balances Special charges $ $ $ $ Gross profit 289 Selling, general and administrative expense Research and development expense Deferred stock option compensation Special charges — other special charges (Gain) loss on sale of businesses and assets Other income (expense) — net Interest expense — long term debt Interest expense — other Income
Consolidated Statement of Operations for the year ended December 31, 2001 Revenues Cost of revenues As previously reported Adjustments As restated $ $ $ 17,408 14,014 1,492 598 18,900 14,612 Gross profit 3,394 894 4,288 Selling, general and administrative expense Research and development expense In-process research and development expense Amortization of intangibles Acquired technology and other Goodwill Deferred stock option compensation Special charges Goodwill impairment Other special char
Summary of Restatement Adjustments for the year ended December 31, 2001: Revenues Cost of revenues Revenues and cost of revenues Foreign exchange Intercompany balances Special charges $ $ $ $ Gross profit 1,012 Selling, general and administrative expense Research and development expense Amortization of intangibles — goodwill Deferred stock option compensation Special charges Goodwill impairment Other special charges (Gain) loss on sale of businesses and assets Other income (expense) — net Intere
Revenues 2002 Revenue recognition adjustments: Application of SAB 101 or SOP 97-2 Title and delivery Undelivered elements and liquidated damages Fixed or determinable fees Reseller transactions Other revenue recognition adjustments $ Increase associated with revenue recognition adjustments 211 45 133 – 53 2001 $ 442 Other adjustments: Foreign exchange Intercompany Special charges Other Reclassifications $ 439 1,624 (190) – 151 (51) 2002 $ 1,534 (3) – – – – Total increase to revenues and cost o
continued to be deferred up to the amount of the maximum potential liquidated damages until either the earlier of when the damages were incurred, or there was no longer the possibility of incurring any damages. As originally recorded, cost provisions were recorded for the amount of the estimated damages and/or cost of product replacement. To correct these items, related cost provisions were reversed and revenues and associated cost of revenues were recognized in the appropriate periods.
For a period of six consecutive quarters ended June 30, 2002, foreign exchange gains or losses were recorded to various components of the consolidated statements of operations rather than as part of other income (expense) — net. This presentation has been adjusted with no effect on net earnings (loss) in any period. Functional currency designation The determination of the functional currency for certain entities was re-examined, based on the guidance under SFAS No.
purchase price was originally recorded as $2,818, payable in common shares of Nortel Networks, $2,318 of which was delivered upon closing and $500 of which was deferred. The deferred consideration could be reduced to zero if Nortel Networks met certain performance criteria under the OEM Agreement. The original accounting assumed the Purchase Agreement and the OEM Agreement were two transactions with separate economic value.
2002 Other adjustments Cost of revenues Selling, general and administrative expense Research and development expense (Gain) loss on sale of businesses and assets Other income (expense) — net Interest expense Income tax benefit (expense) Minority interests — net of tax Equity in net loss of associated companies — net of tax Decrease (increase) to net loss 2001 $ 64 115 89 4 19 (19) 15 26 1 $ 88 233 54 3 (22) (2) (401) (12) – $ 314 $ (59) Cost of revenues For the year ended December 31, 2002, the de
Other income (expense) — net For the year ended December 31, 2002, the decrease of $19 in other expense was primarily the result of a $10 reversal of an item previously expensed related to a reciprocal agreement (offset by a reduction to revenues in a prior period), a $9 decrease from corrections to interest rate swaps relating to debt buybacks and the reduction to other accruals totaling $38, partially offset by a $20 increase from adjustments to the recognition of income and expense associated with sales
2002 Reclassifications Cost of revenues Selling, general and administrative expense Research and development expense Deferred stock option compensation (Gain) loss on sale of businesses and assets Other expense Minority interests — net of tax Net impact of reclassifications 2001 Reclassifications Cost of revenues Selling, general and administrative expense Research and development expense Deferred stock option compensation (Gain) loss on sale of businesses and assets Other expense Minority interests — net o
Other adjustments In periods subsequent to the second quarter of 2001, adjustments were necessary to record gains and losses from the reassessment of the remaining discontinued operations provisions in net earnings (loss) from discontinued operations, in accordance with APB No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions” (“APB 30”).
Consolidated Balance Sheet as of December 31, 2002 ASSETS Current assets Cash and cash equivalents Restricted cash and cash equivalents Accounts receivable — net Inventories — net Income taxes recoverable Deferred income taxes — net Other current assets As previously reported Adjustments As restated $ $ $ (1) – 65 520 56 – (31) 3,790 249 2,228 1,506 114 790 650 Total current assets 8,718 609 9,327 Investments Plant and equipment — net Goodwill Intangible assets — net Deferred income taxes — ne
57 and 107 and rescission of FASB interpretation No. 34” (“FIN 45”). FIN 45 defines a guarantee as a contract that contingently requires a guarantor to pay a guaranteed party as a result of changes in an underlying economic characteristic (such as interest rates or market value) that is related to an asset, a liability or an equity security of the guaranteed party or a third party’s failure to perform under a specified agreement.
Effective July 1, 2003, Nortel Networks prospectively began consolidating two VIEs for which Nortel Networks was considered the primary beneficiary following the guidance of FIN 46, on the basis that Nortel Networks retained certain risks associated with guaranteeing recovery of the unamortized principal balance of the VIEs’ debt, in two lease financing transactions, which represented the majority of the risks associated with the respective VIEs’ activities.
(g) Amendment of SFAS 133 on derivative instruments and hedging activities In April 2003, the FASB issued SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”). SFAS 149 amends and clarifies the accounting for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities under SFAS 133.
The following table presents the impact on net earnings (loss) and on basic and diluted earnings (loss) per common share for the year ended December 31, 2001 from both continuing and discontinued operations of the SFAS 142 requirement to cease the amortization of goodwill as if the standard had been in effect beginning January 1, 2001: 2001 Reported results: Net earnings (loss) from continuing operations Net earnings (loss) from discontinued operations — net of tax Cumulative effect of accounting change —
(m) Derivative financial instruments Effective January 1, 2001, Nortel Networks adopted SFAS 133, and the corresponding amendments under SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities — an amendment of SFAS No. 133” (“SFAS 138”). See note 2(t) for further information regarding the accounting for derivatives under SFAS 133.
Consolidated balance sheets Accounts receivable — net: 2003 Trade receivables Contracts in process $ 2,117 582 2002 $ 2,699 (194) Less: provision for doubtful accounts Accounts receivable — net $ 2,505 1,863 867 2,730 (502) $ 2,228 Inventories — net: 2003 2002 Raw materials Work in process Finished goods $ 249 172 769 $ 339 256 911 Inventories — net(a) $ 1,190 $ 1,506 (a) Net of inventory provisions of $1,226 and $1,180 as of December 31, 2003 and 2002, respectively.
Goodwill: The following table outlines goodwill by reportable segment: Balance — net as of December 31, 2001 Change: Disposal Impairment Foreign exchange Wireless Networks Enterprise Networks Wireline Networks Optical Networks $ $ $ $ 21 – – – Balance — net as of December 31, 2002 Change: Additions (a) Foreign exchange Balance — net as of December 31, 2003 (a) $ 1,658 – – (2) 524 – – (2) 590 Other $ – (595) 5 15 Total $ (15) – – 2,808 (15) (595) 1 21 1,656 522 – – 2,199 13 1 31
Other liabilities: 2003 2002 Pension, post-employment and post-retirement benefit liabilities Long-term provisions $ 1,973 972 $ 1,645 1,116 Other liabilities $ 2,945 $ 2,761 Minority interests in subsidiary companies: 2003 2002 Preferred shares of principal operating subsidiary(a) Series 5, issued November 26, 1996 for consideration of Canadian $400(b) Series 7, issued November 28, 1997 for consideration of Canadian $350(c) Other $ 294 242 81 $ 294 242 95 Minority interests in subsidiary
2003 Cash interest paid Cash taxes paid (recovered) — net $ $ 186 (4) 2002 $ $ 289 (1,208) 2001 $ $ 253 20 Receivables sales: 2003 Proceeds from new securitizations Proceeds from collections reinvested in revolving period securitizations 6.
Segments The following tables set forth information by segment for the years ended December 31: 2003 Revenues Wireless Networks Enterprise Networks Wireline Networks Optical Networks Other $ Total Contribution margin Wireless Networks Enterprise Networks Wireline Networks Optical Networks Other Total Management EBT Wireless Networks Enterprise Networks Wireline Networks Optical Networks Other $ 4,161 2,422 2,572 1,820 33 2001 $ 5,699 3,222 4,328 5,050 601 $ 10,193 $ 11,008 $ 18,900 $ 1,573 560 6
During the years ended December 31, 2003, 2002 and 2001, no customers had revenues greater than 10 percent of consolidated revenues. Geographic information The following table sets forth external revenues by geographic region based on the location of the customer for the years ended December 31: 2003 U.S. EMEA Canada Other regions(a) $ Total $ 10,193 (a) 5,424 2,366 587 1,816 2002 2001 5,823 2,500 648 2,037 $ 10,136 4,380 1,076 3,308 $ 11,008 $ 18,900 $ The Asia Pacific and CALA regions.
7. Special charges During 2003, Nortel Networks continued to implement its restructuring work plan initiated in 2001. In addition, as described below, certain exit activities were initiated in 2003.
Offsetting these charges were revisions to prior accruals of $44 which were primarily related to termination benefits where actual costs were lower than the estimated amounts across all segments. During 2003, the workforce reduction provision balance was drawn down by cash payments of $274 and by a non-cash pension settlement loss of $41. The remaining provision is expected to be substantially drawn down by the end of 2004.
Fair value was determined using quoted market prices or the anticipated cash flows discounted at a rate commensurate with the risks involved. Offsetting these charges were revisions of $55 to prior write downs of assets held for sale related primarily to additional proceeds from disposals of equipment from Optical Networks and other segments in excess of amounts previously expected and adjustments to original plans or estimated amounts for certain facility closures across all segments.
Goodwill and other intangible assets impairment charges totaled $11,833 during the year ended December 31, 2001. In addition to the charge of $11,727 described below, this amount included a goodwill impairment charge of $106 related to the remaining net book value of goodwill associated with the prior acquisitions of MICOM Communications, Corp. and Dimension Enterprises, Inc. (“Dimension”).
Although the outcome of the APA applications are uncertain, Nortel Networks does not believe the ultimate resolution of these negotiations will have a material adverse effect on its consolidated financial position, results of operations or cash flows. However, if this matter is resolved unfavorably, it could have a material adverse effect on Nortel Networks consolidated financial position, results of operations or cash flows.
The following table shows the significant components included in deferred income taxes as of December 31: 2003 Assets: Tax benefit of loss carryforwards and tax credits Provisions and reserves Post-retirement benefits other than pensions Plant and equipment Pension plan liabilities Deferred compensation Unrealized losses on investments $ Valuation allowance Liabilities: Acquired technology Provisions and reserves Plant and equipment Other Net deferred income tax assets $ 5,633 714 234 122 433 277 – 2
defined benefit pension plans (the “Traditional Program”) which are closed to new entrants in the U.K. and portions of which are closed to new entrants in the U.S. and Canada. Although these four kinds of programs represent Nortel Networks major retirement programs and may be available to employees in combination and/or as options within a program, Nortel Networks also has smaller pension plan arrangements in other countries.
The following details the unfunded status of the defined benefit plans and post-retirement benefits other than pensions, and the associated amounts recognized in the consolidated balance sheets as of December 31: Defined benefit plans 2003 Change in benefit obligation: Benefit obligation — beginning Service cost Interest cost Plan participants’ contributions Plan amendments Actuarial loss (gain) Divestitures/settlements Benefits paid Foreign exchange Post-retirement benefits 2002 2003 2002 $ 6,187 118
The following details the net pension expense and the underlying assumptions for the defined benefit plans for the years ended December 31: 2003 Pension expense: Service cost Interest cost Expected return on plan assets Amortization of prior service cost Amortization of net losses (gains) Settlement losses (gains) Curtailment losses (gains) 2002 2001 $ 118 401 (395) 9 50 48 – $ 158 402 (417) 7 17 94 40 $ 200 413 (470) 8 (26) 1 17 Net pension expense $ 231 $ 301 $ 143 Allocation of net pensio
The following details the net cost components, all related to continuing operations, and underlying assumptions of post-retirement benefits other than pensions for the years ended December 31: 2003 Post-retirement benefit cost: Service cost Interest cost Expected return on plan assets Amortization Settlements and curtailments Net post-retirement benefit cost 2002 2001 $ 9 40 (3) (3) – $ 10 37 (3) (3) (9) $ 13 36 (3) (5) (21) $ 43 $ 32 $ 20 Weighted-average assumptions used to determine benefi
instruments are considered investment grade. Included in equity securities are developed and emerging market stocks of companies at a variety of capitalization levels. The securities are predominantly publicly traded. The amount of employer and related-party securities that the defined benefit plans may hold is governed by the statutory limitations of the jurisdictions of the applicable plans.
put and call options and an increase of $45 in intangible assets and $79 in goodwill. The intangible assets of $45 related primarily to customer contracts and customer relationships and are being amortized based on their expected pattern of benefit to future periods using estimates of undiscounted cash flows, and were included in intangible assets on the consolidated balance sheet as of December 31, 2003.
In connection with the acquisition of the 980 NPLC business from JDS, Nortel Networks Corporation issued approximately 65.7 million common shares. The Purchase Agreement included additional consideration, not included in the purchase price, which would be payable after December 31, 2003 in common shares of Nortel Networks Corporation. The actual number of common shares to be issued to satisfy the additional consideration was between 10.9 million and 16.
Sale of Clarify On November 28, 2001, Nortel Networks sold substantially all of the assets of its then wholly owned subsidiary, Clarify, including patents, intellectual property and trademarks, to Amdocs Limited for approximately $200 in cash, resulting in a gain of $16. Closures As part of its restructuring work plan initiated in 2001, Nortel Networks closed the operations of CoreTek and Xros in 2002. In 2001, Nortel Networks closed the operations of EPiCON, Photonic and Dimension (see note 7).
On August 15, 2001, Nortel Networks completed an offering of $1,800 of 4.25% convertible Senior Notes (the “Senior Notes”), due on September 1, 2008. The Senior Notes pay interest on a semi-annual basis on March 1 and September 1, which began March 1, 2002. The Senior Notes are convertible, at any time by holders into common shares of Nortel Networks Corporation, at an initial conversion price of $10 per common share, subject to adjustment upon the occurrence of certain events.
Support facility On February 14, 2003, Nortel Networks principal operating subsidiary, NNL, entered into an agreement with Export Development Canada (“EDC”) regarding arrangements to provide for support, on a secured basis, of certain performance related obligations arising out of normal course business activities for the benefit of Nortel Networks (the “EDC Support Facility”).
swaps and the corresponding fair value adjustment to the hedged debt obligation included within long-term debt are recorded to interest expense within the consolidated statements of operations. These swap contracts have remaining terms to maturity between 2 and 2.5 years. On January 27, 2003, various cross currency coupon swaps (notional amount of Canadian $350) were terminated.
The following table provides the carrying amounts and fair values for financial assets and liabilities for which fair value differed from the carrying amount and fair values recorded for derivative financial instruments in accordance with SFAS 133 as of December 31: 2003 2002 Carrying amount Financial liabilities: Long-term debt due within one year Long-term debt Derivative financial instruments net asset (liability) position: Interest rate swap contracts (a) Forward and option contracts (b) Cross currenc
As of December 31, 2003 and 2002, total accounts receivable securitized and under Nortel Networks management were $359 and $423, respectively. There is a possibility that the actual performance of receivables or the cost of servicing the receivables will differ from the assumptions used to determine fair values at the transfer date and at each reporting date.
The nature of the intellectual property indemnification obligations generally prevents Nortel Networks from making a reasonable estimate of the maximum potential amount it could be required to pay to its customers and suppliers. Historically, Nortel Networks has not made any significant indemnification payments under such agreements. A liability of $6 has been accrued in the consolidated financial statements with respect to the obligations associated with these guarantees as of December 31, 2003.
Nortel Networks has agreed to indemnify its counterparties in receivables securitization transactions. The indemnifications provided to counterparties in these types of transactions may require Nortel Networks to compensate counterparties for costs incurred as a result of changes in laws and regulations (including tax legislation) or in the interpretations of such laws and regulations, or as a result of regulatory penalties that may be suffered by the counterparty as a consequence of the transaction.
Performance related and other bonds generally have a term of twelve months and are typically renewed, as required, over the term of the applicable contract. The various contracts to which these bonds apply generally have terms ranging from two to five years. Any potential payments which might become due under these bonds would be related to Nortel Networks non-performance under the applicable contract.
firm. Nortel Networks had remaining commitments, if requested, of $24 and $30 as of December 31, 2003 and 2002, respectively. These commitments expire at various dates through 2012. Purchase commitments Nortel Networks has entered into purchase commitments with certain suppliers under which it commits to buy a minimum amount or percentage of designated products in exchange for price guarantees or similar concessions.
Expenses related to outsourcing contracts for the years ended December 31, 2003, 2002 and 2001 amounted to $308, $364 and $498, respectively, and were for services provided to Nortel Networks primarily related to a portion of information services, payroll, capital services, accounts payable and training and human resource functions.
greater of Canadian $2.50 per common share and 95 percent of the weighted-average trading price per common share of Nortel Networks Corporation on the TSX for the 10 trading days immediately preceding the date on which such common shares were issued in the exchange.
The U.S. treasury strips were purchased directly by a representative of the underwriters from the gross proceeds of the equity unit offering and were delivered to a third party acting as a custodian on behalf of the equity unit holders. Nortel Networks has no obligations with respect to or interest in the U.S. treasury strips. Accordingly, they are not reflected in the consolidated financial statements.
18.
Options granted under the 2000 Plan and 1986 Plan may be granted with or without a SAR. A SAR entitles the holder to receive payment of an amount equivalent to the excess of the market value of a common share at the time of exercise of the SAR over the subscription price of the common share to which the option relates.
The following is a summary of the total number of outstanding stock options and the maximum number of stock options available for grant: Outstanding options (thousands) Weightedaverage exercise price Available for grant (thousands) Balance at December 31, 2000 Granted options under all stock option plans(a) Options exercised Options cancelled(b) Options cancelled under the stock option exchange program(c) 325,380 55,565 (20,836) (56,793) (93,416) $ $ $ $ $ 32.06 29.45 6.53 35.60 51.
purchased on the open market, or at the discretion of the Committee, or at the election of the holder in certain circumstances, cash in lieu of shares. The number of RSUs (in millions) allocated as of December 31, 2003, 2002 and 2001 was approximately 20, 2 and 2, respectively. The RSUs allocated in 2003 may be issued and settled in four tranches at the discretion of the Committee.
(number of shares in thousands) 2003 Nortel Networks Corporation common shares purchased(a) Weighted-average price of shares purchased (a) $ 11,532 3.10 2002 $ 38,824 1.31 2001 $ 14,648 8.50 Compensation expense was recognized for Nortel Networks portion of the contributions. Nortel Networks contributed an amount equal to the difference between the market price and the purchase price. 20.
(d) Included accruals of $6 and $63 as of December 31, 2003 and 2002, respectively. The accruals consisted of future contractual obligations and estimated liabilities of nil and $14 and accruals of $6 and $49 during the planned period of disposition as of December 31, 2003 and 2002, respectively.
During the year ended December 31, 2002, Nortel Networks reassessed its remaining provisions for discontinued operations and recorded a net additional loss of $97. The loss consisted of additional provisions for both short-term and long-term receivables of $157, offset by gains of $60 due to other changes in estimates. On June 25, 2002, Arris Group completed a secondary public offering of 15 million common shares held by Nortel Networks.
On August 3, 2001, Nortel Networks announced the completion of the previously announced transfer of its ownership interest in Arris Interactive to Arris Group, ANTEC Corporation’s new parent company. As a result, as of December 31, 2001, Nortel Networks owned a 49.2 percent non-controlling interest in Arris Group, compared to the previous 81.25 percent controlling interest in Arris Interactive, including a subordinate redeemable preferred interest in Arris Interactive.
Ontario lawsuit. The plaintiffs in two of these proceedings in Quebec obtained court approval for discontinuances of their proceedings on January 17, 2002. The motion to dismiss and/or stay the third proceeding was heard on November 6, 2001 and the court deferred any determination on the motion to the judge who will hear the application for authorization to commence a class proceeding. On December 6, 2001, the defendants filed a motion seeking leave to appeal that decision.
the Plan. A second purported class action lawsuit, on behalf of the Plan and Plan participants for whose individual accounts the Plan purchased Nortel Networks Corporation common shares during the period from October 27, 2000 to February 15, 2001 and making similar allegations was filed in the same court on March 12, 2002.
certain of its quarterly reports for 2003, and to restate its previously filed financial results for one or more earlier periods, Nortel Networks and certain of its then current and former officers and directors were named as defendants in 27 purported class action lawsuits. These lawsuits in the U.S.
full compliance by 2006. It is expected that these laws will require Nortel Networks to incur additional compliance costs. Although costs relating to environmental matters have not resulted in a material adverse effect on the business, results of operations, financial condition and liquidity in the past, there can be no assurance that Nortel Networks will not be required to incur such costs in the future.
On April 28, 2004, Nortel Networks announced that the Independent Review was extended to include the second half of 2003 and it was determined that the previously announced unaudited results for the year ended December 31, 2003 needed to be revised and that the financial results reported in each of Nortel Networks quarterly periods of 2003 and for earlier periods including 2002 and 2001 needed to be restated.
Networks and NNL’s prior financial results (the “Related Breaches”). The waiver was to remain in effect until the earliest of certain events or May 29, 2004. On March 29, 2004, NNL and EDC also amended the EDC Support Facility to provide that EDC may also suspend its obligation to issue NNL any additional support if events occur that have a material adverse effect on NNL’s business, financial position or results of operations and that such amendment would survive the waiver period.
As a result of the termination of the Five Year Facilities, certain foreign security agreements entered into by NNL and various of its subsidiaries under which shares of certain subsidiaries of NNL incorporated outside of the U.S. and Canada were pledged in favor of the banks under the Five Year Facilities, EDC and the holders of Nortel Networks and NNL’s outstanding public debt securities also terminated in accordance with their terms (see note 24).
and Mexico joined VoltDelta. Nortel Networks recorded a gain on sale of businesses and assets of approximately $50 in the third quarter of 2004. Evolution of Nortel Networks supply chain strategy On June 29, 2004, Nortel Networks announced an agreement with Flextronics International Ltd.
On October 26, 2004, Nortel Networks entered into an agreement with Foundry Networks, Inc. (“Foundry”) to settle outstanding patent infringement claims and counterclaims by the parties. As part of the settlement, Nortel Networks granted Foundry a four year license under certain patents, and Foundry paid $35 to Nortel Networks.
Supplemental Consolidating Statements of Operations for the year ended December 31, 2003: (millions of U.S.
Supplemental Consolidating Statements of Operations for the year ended December 31, 2002: (millions of U.S.
Supplemental Consolidating Statements of Operations for the year ended December 31, 2001: (millions of U.S.
Supplemental Consolidating Balance Sheets as of December 31, 2003: (millions of U.S.
Supplemental Consolidating Balance Sheets as of December 31, 2002: (millions of U.S.
Supplemental Consolidating Statements of Cash Flows for the year ended December 31, 2003: (millions of U.S.
Supplemental Consolidating Statements of Cash Flows for the year ended December 31, 2002: (millions of U.S.
Supplemental Consolidating Statements of Cash Flows for the year ended December 31, 2001: (millions of U.S.
Quarterly Financial Data (Unaudited) 4th Quarter (millions of U.S.
REPORT OF INDEPENDENT REGISTERED CHARTERED ACCOUNTANTS To the Shareholders of Nortel Networks Corporation We have audited the consolidated financial statements of Nortel Networks Corporation and its subsidiaries (“Nortel Networks”) as of December 31, 2003 and 2002, and for each of the three years in the period ended December 31, 2003, and have issued our report thereon dated January 10, 2005, which report expresses an unqualified opinion and includes explanatory paragraphs relating to the restatement of the
Schedule II Consolidated NORTEL NETWORKS CORPORATION Valuation and Qualifying Accounts and Reserves Provision For Uncollectibles (a) (millions of U.S. dollars) U.S. GAAP Balance at beginning of year Additions charged to costs and expenses Deductions(b) Balance at end of year(c) Year 2003 Year 2002(d) Year 2001(d) $ $ $ $ $ $ $ $ $ $ $ $ (a) (b) (c) (d) 1,282 1,540 809 (180) 291 1,791 611 549 1,060 Excludes Discontinued Operations.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure NONE ITEM 9A. Controls and Procedures In light of the relevance of the findings of the Independent Review to the matters addressed in this Item 9A, this Item 9A first sets forth in full the “Summary of Findings and of Recommended Remedial Measures of the Independent Review,” submitted to the Audit Committee by WCPHD and Huron Consulting Services LLC, or the Independent Review Summary.
SUMMARY OF FINDINGS AND OF RECOMMENDED REMEDIAL MEASURES OF THE INDEPENDENT REVIEW SUBMITTED TO THE AUDIT COMMITTEE OF THE BOARDS OF DIRECTORS OF NORTEL NETWORKS CORPORATION AND NORTEL NETWORKS LIMITED Wilmer Cutler Pickering Hale and Dorr LLP 2445 M Street, N.W. Washington, D.C.
In late October 2003, Nortel Networks Corporation (“Nortel” or the “Company”) announced that it intended to restate approximately $900M of liabilities carried on its previously reported balance sheet as of June 30, 2003, following a comprehensive internal review of these liabilities (“First Restatement”).
WCPHD and Huron reported regularly to the Audit Committee on the progress of the investigation. Most, or all, of the independent and nonmanagement Board members attended these Audit Committee briefings. The Chairs of the Audit Committee and of the Board of Directors were briefed between Audit Committee meetings to provide them with a “real time” understanding of the progress of the investigation.
Nortel posted significant losses in 2001 and 2002 and downsized its work force by nearly two-thirds. The remaining employees were asked to undertake significant additional responsibilities with no increase in pay and no bonuses. The Company’s former senior corporate management asserted, at the start of the inquiry, that the Company’s downturn, and concomitant downsizing of operations and workforce, led to a loss of documentation and a decline in financial discipline.
Fourth quarter, 2002. By mid-2002, employees throughout the Company were being recruited by other companies and morale was low. Corporate management sought to retain these employees but recognized that other public companies had come under criticism for awarding “stay” bonuses in the face of enormous losses. At management’s recommendation, the Board determined to reward employees with bonuses under bonus plans tied to profitability.
When presenting the preliminary results for the quarter to the Audit Committee, the Controller inaccurately represented that the vast majority of these releases were “business as usual” and in compliance with U.S. GAAP, and that the remaining releases were one time, non-recurring events and in compliance with U.S. GAAP.
Governing Principles for Remedial Measures The Audit Committee asked WCPHD to recommend governing principles, based on its independent inquiry, to prevent recurrence of the inappropriate accounting conduct, to rebuild a finance environment based on transparency and integrity, and to ensure sound financial reporting and comprehensive disclosure.
The Board of Directors must make clear that it has not tolerated, and will not in the future tolerate, accounting conduct that involves the misapplication of U.S. GAAP. It must further communicate its expectation that every Nortel employee will adhere to the highest ethical standards; will have training and experience commensurate with his or her job responsibilities; and will be held accountable for his or her actions and decisions.
• Processes A basic component of sound corporate oversight is the control structure. Internal controls — the Company’s accounting policies, organizational structure, systems, processes, employees, leadership, and culture — working together, foster accurate financial reporting and sound disclosure in a timely manner. While management has recognized weaknesses in existing processes and controls, and has taken steps to remedy these deficiencies, more needs to be done.
These governing principles are an effort to forge a framework for rebuilding the Nortel finance environment. Equally important, the Board, the CEO, and the CFO must continue to promote high ethical standards throughout the Company. Words announcing adherence to the highest standard of integrity are relatively easy to express, but it is actions, not words, that count. The Board has established the position of a Chief Ethics and Compliance Officer.
Current Management Conclusions Concerning Disclosure Controls and Procedures In January 2005, we carried out an evaluation under the supervision and with the participation of management, including the current CEO and current CFO, pursuant to Rule 13a-15 under the Exchange Act, of the effectiveness of our disclosure controls and procedures as at December 31, 2003 (the end of the period covered by this report) and as at January 10, 2005.
These new conclusions are in contrast to conclusions reached as a result of previous evaluations carried out under the supervision and with the participation of management, including the former chief executive officer and former chief financial officer.
and income statement were much larger. Specifically, what would have been relatively minor amounts in prior periods may be considered to be material to current periods.” As noted in the Independent Review Summary, “Nortel posted significant losses in 2001 and 2002 and downsized its work force by nearly two-thirds. The remaining employees were asked to undertake significant additional responsibilities with no additional increase in pay and no bonuses.
D&T concluded, in respect of this reportable condition, that it was unclear, due to the lack of documentation regarding support for certain provisions and accruals, the passage of time and the turnover of personnel, as to what adjustments, if any, should have been made in prior years. D&T noted that its assessment was based on such information as was available at the date of its communication to the Audit Committee and the materiality of the underlying amounts in the context of 2003 reported results.
... targets. While the dollar value of most of the individual provisions was relatively small, the aggregate value of the provisions made the difference between a profit and a reported loss, on a pro forma basis, in the fourth quarter of 2002 and the difference between a loss and a reported profit, on a pro forma basis, in the first and second quarters of 2003.
In light of the total magnitude of these revenue adjustments, we present below an overview of the principal revenue adjustments required in the Second Restatement to correct accounting errors related to revenue recognition and the general circumstances that gave rise to them.
were recognized upon delivery of interim product solutions pending the availability of the later generation optical product that the customer had ordered. In this circumstance, revenues for the order should have been deferred until the undelivered element was delivered as we did not have evidence supporting the fair value of the undelivered element.
revenues we received on the sale of products or services, the amounts we paid the customer under the reciprocal arrangement should have been treated as a reduction of revenues. Through our review of a substantial number of individual contracts, as noted above, we also identified a limited number of other reciprocal arrangements, which were recorded as permanent reductions in revenue.
report and (ii) the financial statements, and other financial information included in this report, fairly present in all material respects our financial condition, results of operations and cash flows as at, and for, the periods presented in this report.
• Correction of certain inter-company balances that did not properly eliminate upon consolidation and related provisions resulted in a decrease of $36 million and an increase of $42 million to pre-tax loss for 2002 and 2001, respectively. • Adjustments to previously recorded special charges relating to goodwill, inventory impairment, contract settlement costs and other charges resulted in a total decrease to special charges of $78 million in 2002 and $845 million in 2001.
adjustments. We believe the procedures followed in determining such estimates were appropriate and reasonable using the best available information.
• lack of sufficient personnel with appropriate knowledge, experience and training in U.S. GAAP and lack of sufficient analysis and documentation of the application of U.S.
Revenue Independent Review will have a particular emphasis on the underlying conduct that led to the initial recognition of these revenues. The Audit Committee will seek a full understanding of the historic events that required the revenues for these specific transactions to be restated and will consider any appropriate additional remedial measures, including those involving internal controls and processes. The Audit Committee has engaged WCPHD to advise it in connection with the Revenue Independent Review.
• • • • • As part of the initial development of this plan, in the first quarter of 2004, we increased our focus on the review of specific balance sheet accounts. Review of Finance Department Organizational Structure. We announced, and began to implement, plans to transform our finance organization, which include a renewed commitment to transparency as a fundamental goal.
ITEM 10. Directors and Executive Officers of the Registrant Directors of the registrant Directors are elected at the annual meeting of shareholders, except that we can appoint directors in certain circumstances between annual meetings. Each person who is appointed or elected to the board of directors will hold that position until the earliest of: (i) the close of the next annual meeting of shareholders; (ii) the date he or she ceases to be a director by operation of law; or (iii) the date he or she resigns.
DR. MANFRED BISCHOFF, 62, Starnberg, Federal Republic of Germany, was appointed as a director of the Company and Nortel Networks Limited on April 29, 2004. Dr. Bischoff has been Chairman of the Board of European Aeronautic Defence and Space Company EADS N.V., an aerospace company, since July 2000 and Delegate for Aerospace at DaimlerChrysler AG since January 2004. Dr.
JOHN A. MacNAUGHTON, C.M., 59, Toronto, Ontario, Canada, has been nominated for election as a director of the Company and Nortel Networks Limited for the first time. Mr. MacNaughton has served since September 1999 as President and Chief Executive Officer of the Canada Pension Plan Investment Board, a Crown Corporation created by an Act of Parliament in 1997 to invest the assets of the Canada Pension Plan. He is due to retire from that position on January 14, 2005.
HARRY J. PEARCE, 62, Bloomfield Hills, Michigan, United States, was Chairman of the Board of Hughes Electronics Corporation (now The DIRECTV Group, Inc.), a company engaged in digital television entertainment, broadband satellite and network services as well as global video and data broadcasting, from June 2001 to January 2004. He was a director and Vice-Chairman of General Motors Corporation from January 1996 to June 2001. Mr. Pearce is also a director of Marriott International, Inc.
Executive officers and certain other non-executive board appointed officers of the Registrant The executive officers and certain other non-executive board appointed officers of the Company are appointed, and may be removed, by the Board of Directors of the Company. Generally, executive officers and other non-executive officers hold their offices until a successor is appointed or until the officer resigns.
• W.R. Kerr, prior to returning to Nortel Networks as Chief Financial Officer in March 2004, held various senior finance positions with Nortel Networks from January 1999 (and prior thereto) until his retirement in December 2001. He has also served as a director of Bank of China (Canada) since June 1, 1997; • R.Y.L. Mao was, prior to returning to Nortel Networks in January 2003, Chairman and Chief Executive Officer of Foxconn (Beijing) Precision Component Industries, Ltd.
Section 16(a) beneficial ownership reporting compliance Section 16(a) of the United States Securities Exchange Act of 1934 requires directors and executive officers of the Company to file reports concerning their ownership of Company equity securities with the United States Securities and Exchange Commission, the New York Stock Exchange, and the Company.
The Guide to Ethical Business Practices, the Audit Committee Mandates, the Committee on Directors Mandate, the Joint Leadership Resources Mandate, and the Statement of Governance Guidelines, as well as any future amendments to these documents, are available free of charge on our website at www.nortel.com or by writing to the corporate secretary at Nortel Networks Corporation, 8200 Dixie Road, Suite 100, Brampton, Ontario L6T 5P6. ITEM 11.
2004 Name And Principal Position W.A. Owens* President and Chief Executive Officer P. Debon** President, Carrier Networks B.W. McFadden** Chief Technology Officer S.L. Spradley** President, Global Operations N.J. DeRoma Chief Legal Officer F.A.
(3) Represents a tax reimbursement payment in connection with certain permanent transfer expenses. (4) Certain payments paid in euros have been converted to United States dollars and included in this amount. Payments have been converted using the average of the exchange rates in effect during each year equal to US$1.00 = .8027 euros for 2004, US$1.00 = .8830 euros for 2003 and US$1.00 = 1.0615 euros for 2002.
(12) Represents contributions made under the Nortel Networks Limited Investment Plan for Employees — Canada. (13) Represents the United States dollar equivalent of payments actually earned or paid in Canadian dollars. Amounts have been converted using the average of the exchange rates in effect during each year equal to US$1.00 = CDN$1.2978 for 2004, US$1.00 = Cdn$1.4048 for 2003 and US$1.00 = Cdn$1.5708 for 2002. (14) Represents contributions under the Nortel Networks Long-Term Investment Plan.
2003 Long Term Compensation Annual Compensation Name And Principal Position Payouts Other Annual Compensation ($) Securities Underlying Options (#) LTIP Payouts (#) All Other Compensation ($) Year Salary ($) F.A. Dunn* President and Chief 2003 868,750 – (2) 3,540,000(6)(7) – – 225,000(3) 745,000(7)(8) 26,145(4)(5) Executive Officer 2002 2001 825,000 564,833 – – – – 750,000(9) 1,500,000(9)(10) – – 24,747(4)(5) 16,806(4)(5) P.
under the incentive plan for the remaining four segments.
(13) Represents contributions under the Nortel Networks Long-Term Investment Plan or Nortel Networks (UK) Pension Plan, as applicable ($7,200 in 2003, $8,467 in 2002 and $6,068 in 2001), and expatriate, permanent transfer and other similar expenses related to Mr. Debon’s global responsibilities as President, Wireless Networks ($85,146 in 2003, $117,408 in 2002 and $325,952 in 2001). (14) Mr. Debon, Mr. Bolouri, Ms. Spradley and Mr.
Aggregate option exercises in 2004 and 2003 and year-end option values No options were exercised by any named executive officers for 2004 during the fiscal year ended December 31, 2004 and no options were exercised by any named executive officers for 2003 during the fiscal year ended December 31, 2003.
* On April 27, 2004, Mr. Dunn’s employment as President and Chief Executive Officer of the Company and Nortel Networks Limited was terminated for cause.
41,999 of the stock options granted to Ms. Spradley in 2002 were granted pursuant to the voluntary stock option exchange program. All of those options were exercisable as of December 31, 2004. (7) As a result of the termination of Mr. Dunn’s employment for cause on April 27, 2004, all United States dollar and Canadian dollar options held by Mr. Dunn terminated and expired automatically on April 27, 2004, including all performance accelerated stock options.
(5) As a result of the termination of Mr. Dunn’s employment for cause on April 27, 2004, all options held by Mr. Dunn terminated and expired automatically on April 27, 2004, including all performance accelerated stock options. Previously, in June 2003, Mr.
The Company and Nortel Networks Limited have demanded repayment from the chief financial officer and controller of the restricted stock units issued and settled in July 2003 with respect to the achievement of the first performance threshold and, with respect to the controller, the restricted stock units issued and settled in January 2004 with respect to the achievement of the second performance threshold.
Defined Benefit Pension Plan — United States A defined benefit pension plan, the Nortel Networks Retirement Income Plan, is maintained for eligible employees and executives in the United States. Benefits are paid to plan participants under one of two formulas, depending on elections made by the plan participant: the Pension Service Plan (or PSP) formula or the Cash Balance Plan formula. The PSP formula is available for participants who are employees of Nortel Networks Inc.
Pension benefits from the SERP are funded from the general assets of, respectively, Nortel Networks Limited and NNTC in Canada and Nortel Networks Inc. in the United States. The following tables show the aggregate approximate annual retirement benefits for an eligible executive officer for certain compensation and years of service categories assuming retirement at age 65, and assuming grandfathering provisions do not apply.
Table II Years of Service Total Earnings 5 10 15 20 25 30 35 $600,000 $10,330 $20,659 $30,989 $41,318 $51,648 $61,978 $72,308 700,000 800,000 900,000 12,051 13,773 15,494 24,102 27,546 30,989 36,153 41,318 46,483 48,204 55,091 61,977 60,256 68,864 77,472 72,307 82,637 92,967 84,359 96,411 108,462 1,000,000 1,100,000 17,216 18,938 34,432 37,875 51,648 56,813 68,863 75,750 86,080 94,688 103,296 113,626 120,513 132,565 1,200,000 1,300,000 1,400,000 20,659 22,381 24,103 41,318
leadership resources committee of the boards of directors of the Company and Nortel Networks Limited, and was not renewed subsequent to March 2002. Under the terms of the agreement, Mr. DeRoma is also eligible for the Nortel Networks Limited Special Pension Credit Program which covered new executive hires older than age 35. Mr. DeRoma will be credited, for pension purposes, with additional years and months equal to one half of the years between the age of 35 and Mr.
Compensation of directors Effective January 1, 2002, each non-employee director of the Company and Nortel Networks Limited elected to receive all compensation for services rendered as a member of the board of directors of the Company and Nortel Networks Limited, any committees thereof, and as board or committee chairperson, in the form of share units, instead of cash, under the Directors’ Deferred Share Compensation Plans maintained by the Company and Nortel Networks Limited.
chairman of the board of directors of the Company and Nortel Networks Limited, in the form of share units until such time as the share ownership guidelines are met. Share units credited under the Directors’ Deferred Share Compensation Plans are included in the calculation of the number of common shares of the Company owned by a director for this purpose. Messrs.
A person is deemed to be a beneficial owner of a common share if that person has, or shares, the power to direct the vote or investment of the common share. Under applicable United States securities laws, a person is also deemed to be a beneficial owner of a common share if such person has the right to acquire the share within 60 days (whether or not, in the case of a stock option, the current market price of the underlying common share is below the stock option exercise price).
*** Mr. Dunn ceased to be President and Chief Executive Officer of the Company and Nortel Networks Limited on April 27, 2004 and ceased to be a director of the Company and Nortel Networks Limited on May 21, 2004. **** A named executive officer in 2003 only. (1) Except as set forth below, each person has sole investment and voting power with respect to the common shares beneficially owned by such person.
(17) Includes 1,453,334 common shares subject to stock options and 397,127 common shares as to which Mr. DeRoma shares investment and voting power with his spouse. (18) Includes 15,124,239 common shares subject to stock options. Also includes 420,920 common shares as to which investment and voting power is shared with one or more other persons. Excludes 52,854 common shares as to which beneficial ownership is disclaimed.
• Nortel Networks Corporation 1986 Stock Option Plan as amended and restated (the “1986 Stock Option Plan” and, collectively with the 2000 Stock Option Plan, the “Stock Option Plans”). The table does not provide information with respect to equity compensation plans that have expired or are no longer in effect.
to the overall relocation policy. Effective July 30, 2002, and in accordance with the United States Sarbanes-Oxley Act of 2002, the Company no longer offers its executive officers housing loans as part of their relocation assistance. No loans have been extended by the Company or its subsidiaries to any director or executive officer of the Company since January 1, 2003.
2002, respectively, for the following audit services: (i) audits of the annual consolidated financial statements of the Company and Nortel Networks Limited included in annual reports on Form 10-K and annual reports to shareholders for the fiscal years ended December 31, 2003 and 2002; (ii) reviews of the interim financial statements of the Company and Nortel Networks Limited included in quarterly reports on Form 10-Q and quarterly reports to shareholders for the periods ended March 31, June 30 and September
PART IV ITEM 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K 1. Financial Statements The index to the Consolidated Financial Statements appears on page •. 2. Financial Statement Schedules Page Quarterly Financial Data (Unaudited) Report of Independent Registered Chartered Accountants II — Valuation and Qualifying Accounts and Reserves, Provision for Uncollectibles Audited Financial Statements and the notes thereto of Nortel Networks S.A.
Nortel Networks Corporation filed a Current Report on Form 8-K dated April 14, 2004 related to a press release updating the status of Ontario Securities Commission inquiry. Nortel Networks Corporation filed a Current Report on Form 8-K dated April 28, 2004 related to a press release announcing the appointment of William A. Owens as President and Chief Executive Officer, other management changes and an update on a number of matters, including the status of certain prior year financial statements.
Nortel Networks Corporation filed a Current Report on Form 8-K dated August 19, 2004 related to a press release providing a status update on its financial restatement process and other related matters. Nortel Networks Corporation filed a Current Report on Form 8-K dated August 20, 2004 related to a press release announcing a new waiver from Export Development Canada.
Nortel Networks Corporation filed a Current Report on Form 8-K dated December 22, 2004 related to a press release providing a status update on its financial restatement process and other related matters. Nortel Networks Corporation filed a Current Report on Form 8-K dated January 4, 2005 related to a press release advising that the New York Stock Exchange has granted a three month extension to file the 2003 Annual Reports on Form 10-K with the Securities and Exchange Commission.
4. Exhibit Index The items listed as Exhibits 10.2 to 10.7, 10.27 to 10.45 and item 10.49 relate to management contracts or compensatory plans or arrangements. Exhibit Number *2. Description Amended and Restated Arrangement Agreement involving BCE Inc., Nortel Networks Corporation, formerly known as New Nortel Inc.
Number Description *4.6 Instrument of Resignation, Appointment and Acceptance entered into as of December 19, 2002, effective as of January 2, 2003, among Nortel Networks Limited, as issuer and guarantor, Nortel Networks Capital Corporation, as issuer, Citibank, N.A. and Deutsche Bank Trust Company Americas, with respect to the Indenture dated as of December 5, 2000, as supplemented by a First Supplemental Indenture dated as of February 1, 2001 related to debt securities (filed as Exhibit 4.
Number Description *10.11 U.S. Guarantee and Security Agreement dated as of the first day of the “Collateral Period” (as defined therein) among Nortel Networks Limited, Nortel Networks Inc. and certain of their subsidiaries and JPMorgan Chase Bank, as Collateral Agent (filed as Exhibit 99.1 to Nortel Networks Corporation’s Current Report on Form 8-K dated January 18, 2002). *10.12 Amendment No. 1 dated as of December 12, 2002 to the U.S.
Number Description *10.22 Foreign Pledge Agreement dated as of April 4, 2002 between Nortel Networks International Finance & Holding B.V. and JPMorgan Chase Bank, as Collateral Agent, together with (a) the Pledge Agreement Supplement, dated as of April 4, 2002 between Nortel Networks Optical Components Limited and JPMorgan Chase Bank, as Collateral Agent, and (b) the Pledge Agreement Supplement dated as of April 4, 2002 between Nortel Networks International Finance & Holding B.V.
Number Description *10.33 Resolutions of the Board of Directors of Nortel Networks Limited dated December 17, 1993, as amended by resolutions of the Board of Directors of Nortel Networks Limited dated February 29, 1996, providing for retirement compensation of directors who are not salaried employees of Nortel Networks Limited or its subsidiaries (filed as Exhibit 10.33 to Nortel Networks Corporation’s Annual Report on Form 10-K for the year ended December 31, 2002). *10.
Number Description *10.46 Master Facility Agreement dated as of February 14, 2003 between Nortel Networks Limited and Export Development Canada (filed as Exhibit 99.2 to Nortel Networks Corporation’s Current Report on Form 8-K dated February 14, 2003). *10.47 Master Indemnity Agreement dated as of February 14, 2003 between Nortel Networks Limited and Export Development Canada (filed as Exhibit 99.3 to Nortel Networks Corporation’s Current Report on Form 8-K dated February 14, 2003). *10.
NORTEL NETWORKS S.A.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and Board of Directors of Nortel Networks S.A. We have audited the accompanying consolidated balance sheets of Nortel Networks S.A., a subsidiary of Nortel Networks Limited, and its subsidiaries as of December 31, 2003 and 2002 and the related consolidated statements of operations, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003 (all expressed in Euros).
NORTEL NETWORKS S.A.
NORTEL NETWORKS S.A.
NORTEL NETWORKS S.A.
NORTEL NETWORKS S.A.
NORTEL NETWORKS S.A. (a Subsidiary of Nortel Networks Limited) Notes to Consolidated Financial Statements (thousands of euros, unless otherwise stated) 1. Nortel Networks S.A. All of the shares of Nortel Networks S.A. are owned by Nortel Networks Limited (“Nortel Networks”) and Nortel Networks International Finance & Holding B.V. (“NNIF&H B.V.”), which is an indirect wholly owned subsidiary of Nortel Networks. Nortel Networks S.A.
expected residual returns. Intercompany accounts and transactions are eliminated upon consolidation and unrealized intercompany gains and losses are eliminated when accounting under the equity method. (b) Use of estimates Nortel Networks S.A.
recognized under SOP 97-2 and revenue related to the hardware element is recognized under SOP 81-1 or SAB 101. For accounting units related to customized network solutions and certain network build outs, revenues are recognized under SOP 81-1 using the percentage-of-completion method. In using the percentage-of-completion method, revenues are generally recorded based on a measure of the percentage of costs incurred to date on a contract relative to the estimated total expected contract costs.
In establishing the appropriate income tax valuation allowances, Nortel Networks S.A. assesses the realizability of its net deferred tax assets and based on all available evidence, both positive and negative, determines whether it is more likely than not that the remaining net deferred tax assets or a portion thereof will be realized. (g) Cash and cash equivalents Cash and cash equivalents consist of cash on hand, balances with banks and short-term investments.
(l) Plant and equipment Plant and equipment are stated at cost less accumulated depreciation. Depreciation is generally calculated on a straight-line basis over the expected useful lives of the plant and equipment. The expected useful lives of buildings are twenty to forty years, and of machinery and equipment are five to ten years. (m) Impairment or disposal of long-lived assets (plant and equipment and other intangible assets) Long-lived assets held and used Nortel Networks S.A.
The impairment test for goodwill is a two-step process. Step one consists of a comparison of the fair value of a reporting unit with its carrying amount, including the goodwill allocated to the reporting unit. Measurement of the fair value of a reporting unit is based on one or more fair value measures including present value techniques of estimated future cash flows and estimated amounts at which the unit as a whole could be bought or sold in a current transaction between willing parties.
to the settlement date are recorded in net earnings (loss) in the period incurred. The payment amount is established for Stock Appreciation Rights (“SARs”) on the date of exercise of the award by the employee, for Restricted Stock Units (“RSUs”) on the vesting date of the award. Stock-based awards which are substantively discretionary in nature are recorded in the period that the issuance and settlement of the award is approved.
Comparative figures Certain 2002 and 2001 figures in the consolidated financial statements have been reclassified to conform to the 2003 presentation and have been restated as set out in note 3. 3. Restatement First Restatement In May 2003, NNC and its subsidiaries (including Nortel Networks S.A.
accruals and provisions and the application of accounting literature to certain matters in the Second Restatement, including revenue recognition, foreign exchange, special charges and discontinued operations, was complicated by the passage of time, lack of availability of supporting records and the turnover of finance personnel.
Summary of Restatement Adjustments for the year ended December 31, 2002: Revenues — external Revenues — related parties Accruals and provisions Related party transactions Plant and equipment Total adjustments € € € € Cost of revenues Gross profit Selling, general and administrative expense Research and development expense Special charges — other special charges Other income (expense) — net Foreign exchange gain (loss) Interest expense € Total restatement adjustments – – – (5,362) – 9,030 (5,
Summary of Restatement Adjustments for the year ended December 31, 2001: Revenues — external Revenues — related parties Accruals and provisions Related party transactions Plant and equipment Total adjustments € € € € – – – 9,800 Cost of revenues – (13,700) 9,800 (60,747) Gross profit Selling, general and administrative expense Research and development expense Special charges — other special charges Other income (expense) — net Interest expense 13,700 (55) (13,358) (8,095) (435) – 70,547 – –
Selling, general and administrative expense The variations to selling, general and administrative expense were due to the following factors: 2002 Increase (decrease) of selling, general and administrative expense Customer related Employee related Other accounts payable Tax Other Net increase (decrease) of selling, general and administrative expense 2001 € (102) (300) (28) 1,910 (1,900) € – – (44) (1,910) 1,899 € (420) € (55) Research and development expense The variations to research and developm
Residual profit sharing Adjustments to cost of revenues of Nortel Networks S.A. are primarily due to adjustments to the results of Nortel Networks resulting from the restatements. These adjustments impact the cost of revenues of Nortel Networks S.A. through the global profit split methodology implemented since 2001 (see note 10). The share of Nortel Networks S.A.
Costs of revenues, research and development expense Adjustments to cost of revenues and research and development were mainly driven by corrections of errors in the depreciation periods of various plant and equipment, items that had been classified as plant and equipment in error and that should have been expensed, as well as the timing of the write off of certain plant and equipment.
Consolidated Balance Sheets as of December 31, 2002 ASSETS Current assets Cash and cash equivalents Accounts receivable Inventories — net Receivables from related parties Other current assets Second Restatement Adjustments Pooling of interest Adjustments As pooled and restated € € € € 150,419 83,955 80,070 234,071 106,364 66,687 45,665 58,385 123,272 99,490 897 164 838 115,237 (2,972) 82,835 38,126 20,847 (4,438) 9,846 Total current assets 393,499 114,164 147,216 654,879 Long-term receivabl
issued or modified after December 31, 2002. The adoption of FIN 45 did not have a material impact on the results of operations and financial condition of Nortel Networks S.A. (see note 12). (b) Asset retirement obligations In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS 143”), which applies to certain obligations associated with the retirement of tangible long-lived assets.
SOP 97-2. The adoption of EITF 00-21 and EITF 03-5 did not have a material impact on Nortel Networks S.A. results of operations and financial condition. (f) Amendment of SFAS 133 on derivative instruments and hedging activities In April 2003, the FASB issued SFAS No. 149, “Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities” (“SFAS 149”).
The following table presents the impact on net earnings (loss) for the year ended December 31, 2001 of the SFAS 142 requirement to cease the amortization of goodwill as if the standard had been in effect beginning January 1, 2001. 2001 (j) Net earnings (loss) — reported Amortization of goodwill € (339,539) 3,434 Net earnings (loss) — adjusted € (336,105) Impairment or disposal of long-lived assets (plant and equipment) In August 2001, the FASB issued SFAS No.
Other income (expense) — net: 2003 2002 2001 Royalties (a) — net Other — net € (4,479) 6,494 € 16,559 6,479 € 29,888 24,110 Other income (expenses) — net € 2,015 € 23,038 € 53,998 (a) Certain affiliated entities pay royalty fees to Nortel Networks S.A. on their total Global System for Mobile communications (“GSM”) technology sales (4 percent of total GSM sales in 2003, 5 percent in 2002, and 10 percent in 2001). Nortel Networks France pays 7 percent of its revenue to affiliated entities.
Plant and equipment — net: Cost: Land and buildings Leasehold improvements Machinery and equipment Furniture and fixtures Computers Other 2003 2002 € 104,810 31,243 219,818 44,058 6,893 1,430 € 114,660 38,310 203,553 37,146 22,130 15,885 408,252 431,684 (15,943) (21,872) (141,072) (38,604) (5,700) (892) (16,681) (34,356) (115,201) (19,355) (19,340) (8,630) (224,083) (213,563) Less accumulated depreciation: Buildings Leasehold improvements Machinery and equipment Furniture and fixtures Computers
Other accrued liabilities: 2003 2002 Put option(a) Selling, general and administrative related Customer deposit Product related Warranty Miscellaneous taxes Deferred income Research and development Contract manufacturers Guarantees to purchasers of disposed businesses Other € – 4,565 9,676 4,772 6,379 4,755 48,050 7,104 12,941 3,856 3,641 € 77,500 9,079 19,994 10,535 3,776 1,538 15,181 16,114 7,958 4,075 8,510 Other accrued liabilities € 105,739 € 174,260 2003 2002 (a) The put option was exerci
6. Segment information General description During 2003 and up to September 30, 2004, Nortel Networks S.A. operations (including the operations of Northern Telecom France and Nortel Networks France (see note 2)) were organized around four reportable segments consisting of Wireless Networks, Enterprise Networks, Wireline Networks and Optical Networks.
Segments The following tables set forth information by segment for the years ended December 31: 2003 2002 2001 Revenues Wireless Networks Enterprise Networks Wireline Networks Optical Networks Other € 214,732 51,018 50,729 21,065 6,464 € 164,829 64,538 63,523 40,083 23,343 € 202,741 87,860 130,322 136,753 210,037 Total € 344,008 € 356,316 € 767,713 € 1,361 9,956 28,774 3,989 88,004 € 51,869 20,554 52,369 16,728 3,865 € (105,374) (5,786) 52,157 (19,765) (6,646) Total € 132,084 € 145,385 €
Geographic information The following table sets forth external revenues by geographic region based on the location of the customer for the years ended December 31: 2003 2002 2001 External revenues France EMEA (a) - excluding France Other € 264,398 79,550 60 € 259,717 95,950 649 € 614,648 150,872 2,193 Total € 344,008 € 356,316 € 767,713 (a) Europe, Middle East and Africa Long-lived assets Substantially all long-lived assets are located in France. 7.
Year ended December 31, 2003 For the year ended December 31, 2003, Nortel Networks S.A. recorded total special charges of €24,563. Workforce reduction charges of €19,133 were related to severance and benefit costs associated with the approximately 193 employees notified of termination. During 2003, the workforce reduction provision balance was drawn down by cash payments of €24,399, resulting in an ending provision balance for workforce reduction of €4,696.
8. Income taxes The following is a reconciliation of income taxes, calculated at the French income tax rate, to the income tax benefit (expense) included in the consolidated statements of operations for the years ended December 31: 2003 2002 2001 Income taxes at French rates (2003 - 35.4% 2002 - 35.4% 2001 - 36.
9. Acquisitions and divestitures Acquisitions Northern Telecom France On June 24, 2003, Nortel Networks S.A. acquired the outstanding shares of Northern Telecom France from NNI for a purchase price of €83,800 in cash. The purchase price has been presented as a decrease of €83,800 in the additional paid-in capital of Nortel Networks S.A. as Northern Telecom France has already been included in the financial statement presentation for all periods (see note 2).
10. Related party transactions In the ordinary course of business, Nortel Networks S.A. engages in transactions with Nortel Networks and certain of Nortel Networks affiliates. These transactions are measured at their exchange amounts.
In accordance with these agreements Nortel Networks S.A. recorded related party revenues of approximately €35,903, €3,000, and €28,963 in the years 2003, 2002, and 2001 respectively. No cost of revenues to related parties are directly linked to these transactions. Representative activity Nortel Networks France is acting as the representative of certain of its affiliates in certain transactions with a French based customer.
11. Financial instruments Share pledge The security agreements that were entered into in connection with the December 2001 364-day syndicated credit facilities of Nortel Networks and its subsidiary, NNI , provided for the granting of security in the event that Nortel Networks debt ratings fell below investment grade. As of December 31, 2003, the security included pledges by Nortel Networks and NNIF&H B.V. of their shares of Nortel Networks S.A. (see note 16).
guarantees and the lack of limitations on the potential liability. Historically, Nortel Networks S.A. has not made any significant indemnification payments under such agreements and no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees. Other indemnification agreements Nortel Networks S.A.
On September 30, 2001, Nortel Networks France sold its subsidiary MNCD to a third party. Under this transaction, Nortel Networks France has taken certain commitments relative to the amount of the net assets of MNCD as of September 30, 2001. Nortel Networks France has already had to make several payments under this commitment. An amount of €2,226 was accrued and is included in “Other accrued liabilities”.
On June 30, 2001 the shareholders meeting of Nortel Networks France approved a dividend payment of €61,812 payable in EADS Telecom shares that resulted in the reduction of retained earnings of €21,912 and minority interest of €27,816. An amount of €12,084 was paid to other companies pooled by Nortel Networks S.A.
The following is a summary of the total number of outstanding stock options issued to employees of Nortel Networks S.A.: Outstanding options (thousands) Weighted average exercise price (U.S.$) Balance at December 31, 2000 Granted options under all stock option plans Options exercised Options cancelled Options cancelled under stock option exchange program(a) 6,976 1,320 (157) (1,086) (3,604) $ $ $ $ $ 38.10 30.36 8.91 47.84 51.
employees may have up to 10 percent of their eligible compensation deducted from their pay during each offering period to contribute towards the purchase of Nortel Networks Corporation common shares. The Nortel Networks Corporation common shares are purchased by an independent broker through the facilities of the TSX and/or NYSE, and held by a custodian on behalf of the plan participants.
On May 17, 2004, NNC announced that the OSC had issued a temporary order that prohibits all trading by directors, officers and certain current and former employees in the securities of Nortel Networks and NNC, which temporary order was replaced with a final order issued on May 31, 2004. The final order remains in effect until two full business days following the receipt by the OSC of all filings required to be made by Nortel Networks and NNC pursuant to Ontario securities laws.
to purchase similar operations at the Nortel Networks Monkstown, Northern Ireland and Chateaudun, France Systems Houses, subject to the completion of the required information and consultation process. The Chateaudun System House is a property of Nortel Networks S.A.
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Brampton, Ontario, Canada on the 10th day of January, 2005. NORTEL NETWORKS CORPORATION By: /s/ WILLIAM A. O WENS (William A.
Directors M. B ISCHOFF* R.A. INGRAM* (M. BISCHOFF) (R.A. INGRAM) J.J. BLANCHARD* J. MANLEY * (J.J. BLANCHARD) (J. MANLEY) R.E. BROWN* W.A. O WENS* (R.E. BROWN) (W.A. OWENS) J.E. C LEGHORN* G. SAUCIER* (J.E. CLEGHORN) (G. SAUCIER) L.Y. FORTIER * S.H. SMITH , JR.* (L.Y. FORTIER) (S.H. SMITH, JR.) L.R. W ILSON* (L.R. WILSON) By:* /s/ G ORDON A. D AVIES (GORDON A.